Will Inflation Repeat the 1970s Rollercoaster? Part Two

Michael LebowitzAdvisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.

This is part two of a three-part series.

Part one highlighted how the government's fixation with full employment and the Fed's belief in the faulty Phillips curve model fueled inflation in the 1970s. I also touched on that fateful day in 1971 when President Nixon removed the fiscal and monetary shackles, essentially giving the government and Fed more power to alter the economy and stoke inflation.

I start part two with more on the Fed and the nation's money supply. While the Fed and government played a significant role in generating inflation, there were other factors.

The Fed may have set the inflation fire, but the same Fed under Paul Volcker also helped extinguish it. I will examine the change in mindset at the Fed in the mid- to late 1970s.

To recall from part one, inflation is a critical component in assessing future stock and bond performance. To better evaluate the odds that high inflation creeps up again, as it did in the 1870s, we must understand what happened then and appreciate the similarities and differences from today.